India: Termination Of Employment In Software Development Companies And The Dilemma Concerning Applicable Chapter For Retrenchment Under The Industrial Disputes Act

I.T. companies juggle with the applicability of various labour laws based on different interpretations concerning whether or not they are factories based on the manufacturing activity carried on by them and what are the compliances that need to be made. Key among the concerns of the HR teams of such companies while terminating employees is whether they should apply upon their company the label of an 'industrial establishment' and hence undertake measures under compliance driven Chapter VB comprising Section 25N of the Industrial Disputes Act, 1947 ("ID Act") or should they proceed, as per general practice, with the less onerous Chapter VA.

Whether a software development company is as an 'industrial establishment' has been a subject matter of debate over the past few years and while there are judicial precedents which indicate that the software development would fall outside the purview of Section 25N of the ID Act, the issue still is not settled.

BRIEF LEGAL BACKGROUND:

For the purposes of Chapter VB and the consequent applicability of retrenchment provisions under Section 25N, the term 'industrial establishment' has separately been defined under Section 25L of the ID Act. Accordingly, the term industrial establishment covers within its ambit, a factory (defined under the Factories Act, 1948), a mine (defined under the Mines Act, 1952) and a plantation (defined under the Plantations Labour Act, 1951). A factory under the Factories Act, 1948 ("FC Act") inter alia includes any premises including the precincts thereof where 10 or more workers are working and in any part of which a manufacturing process is being carried on with the aid of power.  Explanation II to the aforesaid definition states that the mere fact that an Electronic Data Processing Unit or Computer Unit is installed in any premises or part thereof shall not be construed to be make it a factory if no manufacturing process is being carried on in such premises or part thereof. A manufacturing process in this regard has been defined under the FC Act to mean any process inter alia for the making altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing, or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal.

JUDICIAL PRECEDENTS:

The issue whether a software development company engages in a manufacturing process to be covered under the definition of factory has been taken up before various Indian Courts, as briefly discussed below:

  • Madras High Court in Seelan Case: The Division Bench of the Madras High Court in the matter of Seelan Raj R and 14 Others vs. P.O., I Addl Labour Court and Ors1. ("Seelan Case") inter alia observed that: "on a plain reading of Explanation II ... it becomes abundantly clear that an electronic data processing unit or computer unit installed in any premises or part thereof, and such activities may amount to manufacturing process, bringing within the ambit of 'factory' as defined under the Section 2(m) of the Factories Act, yet Explanation II grants an exemption immunity to electronic data processing or computer unit from being within the purview of the welfare legislator namely the labour laws. Thus, an establishment solely engaged as an electronic data processing unit or computer unit, though may be a factory, yet would be exempted from the application of labour laws by virtue of Explanation II and such establishment cannot be held as a factory."
  • Supreme Court in Seelan Case: The Seelan Case was the subject matter of appeal in the Supreme Court in Seelan Raj R and Ors vs. Presiding Officer 1st Additional Labour Court and Ors2. The Supreme Court referred to the background of the case - wherein the respondent company has been formed with the object of rendering computer services to its customers relating to collection and maintenance of information and develop company software application to suit special requirements of the customer and that subsequently it set up a data processing division. The data processing division was closed due to becoming unviable and the respondent company claimed that being a software manufacturer it was outside of the definition of the "factory". While the Labour Court held the company to be a factory the (single and) division bench of the Madras High Court held as above. Interestingly, the Supreme Court pointed to similar issues having been raised in the matter of Tata Consultancy Services vs. State of Andhra Pradesh ("TCS case") which had been referred to a larger bench and for similar reasons referred this matter to a larger bench.
  • Supreme Court in TCS Case: The Supreme Court in its judgment in 2004 in the TCS case limited itself to the determination that branded software was "goods". On other issues it stated that "before the High Court certain other questions were raised. However, those have not been agitated or pressed before us." Thus, there was no determination concerning ID Act issues.
  • Mumbai High Court in Western Outdoor Case: A single bench of the Mumbai High Court in The Assistant Director vs M/S. Western Outdoor Interactive Pvt. Ltd.3 ("Western Outdoor Case") in the context of the Employees State Insurance Act, 1948 ("ESI Act") while dealing with a company being a computer unit involved in software development and other activities not only distinguished the provisions of the ESI Act and ID Act with reference to definition of factory but also stated as below concerning the rationale expressed by Division Bench of Madras High Court: "...with due respect, I endorse my disagreement with the view taken by the Division Bench of the Madras High Court on the point of Explanation-II of Section 2(m) of the Factories Act." It further observed that "the issue of interpretation of "manufacturing process" in Explanation II of Section 2(m) of the Factories Act is not finally decided by the Supreme Court hence the issue is still res-integra." Based on interpretation and provisions of the ESI Act the Court held that (a) creation of software or development of software itself is a manufacturing process, and (b) premises where computers are involved in manufacturing process would be considered a factory under the ESI Act.

CONCLUDING REMARKS:

The above judgements reflect the fluid nature of interpretation which can be taken concerning whether I.T. industries can be considered as factories and to what extent such an interpretation would require these companies to now press ahead with compliances under Chapter VB of the ID Act.

Until the matter is settled by the Supreme Court, the issue would continue to be open to varied views on what is the best course to adopt and whether or not they should apply Section 25N of the ID Act to themselves and hence seek prior permission of the authorities for employee termination in addition to paying retrenchment compensation. 

Footnotes

1 1999 (2) CTC 317.

2 2001 (2) SCR 462.

3 2012(5)BomC R680.

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